BUILDING YOUR PORTFOLIO

Crafting a tailor-made portfolio can be a tricky art to master. We look at how to apply a popular strategy.

Before you invest in funds, there are some things you need to know.

Our investment ideas are for people who:

Do their own research to see if a fund fits with their investment objective

Understand a fund and its income can fall as well as rise in value and that you could get back less than you invest

Know how to select and maintain a diversified portfolio to reduce risk

We think it's important to have considered your goals when investing, and regularly assess your investments against these. If you need help with this or if you're not sure an investment is right for you, we have experienced financial advisers who can help.

Think about a core-satellite strategy

It's a strategy that does what it says on the tin.

A core-satellite approach involves holding a main core of investments, surrounded by smaller satellites.

The idea is to help you achieve greater returns with a relatively-lower level of risk, thanks to diversification. Holding a well thought out portfolio that includes lots of different types of investments reduces the impact of any one area performing poorly.

We think it's a great strategy for lots of investors, experienced or novice.

Own more UK investments

Being UK investors, we think it makes sense to pay extra attention to our home market.

Investors should absolutely look overseas for extra diversification, but when we spend in sterling, it makes sense to hold investments in sterling. That way we don't have to worry about changes in exchange rates.

The UK makes up about 5% of global stock markets. At HL we think investors should invest a higher proportion of their portfolio here, compared to the global benchmarks – we suggest 20% or more. An income portfolio might consider even greater exposure to the UK, given the UK is traditionally one of the highest-yielding equity markets.

Putting in to practice

Think about holding a few different UK funds to create your core, and start looking wider for some satellites.

A more adventurous approach, with 10 or more years to invest, should focus mostly on funds that invest in shares. For some ideas to help build a core, have a look at the UK Equity Income and UK Growth ideas below. Other investment types will lower your overall growth potential, but might prop the portfolio up when markets dip.

A more cautious approach with a 5-10 year horizon should be looking at a mixed strategy. Bonds are generally thought of as lower risk than shares, but have lower growth potential. We think holding several mixed funds as a core makes sense here, as long as the fund goals match your own. The fund managers will handle all the asset allocation – deciding how much to invest in asset classes like bonds or shares.

Global funds are a good starting point for satellites. They'll give diversification across lots of countries in a single package. You can then look at different investment styles in the global sector for even more diversification.

Finally, make sure you understand the specific risks of a fund before you invest. Read the Key Investor Information Document (KIID) for the details.

What could good look like

ADVENTUROUS

Core

UK Growth Funds

UK Equity Income Funds

Satellite

Global

Mixed

CAUTIOUS

Core

Mixed

Satellite

Global

UK Equity

UK Growth

How can HL help?

If you're comfortable choosing your own investments, we have a wide-range of research, from fund updates to sector reviews. They can be great for some inspiration on building out your core, or adding any satellites you think you're missing.

We cover a range of funds in our research, including those most popular with our clients. We use quantitative models, where we look at what the fund manager's been doing and how that's affected performance. Then we meet with the managers to really get a feel for their process, what they're like as managers and to provide a layer of challenge for our clients.

Even with a good amount of research, holding a wide-range of investments is always the best way to minimise risks. Whatever strategy you choose, diversification across several investments is key.

There's no rule which says that you have to have a balanced, diversified portfolio. However, different areas, investing styles, and asset classes can perform differently at different times. If you choose funds that all invest in the same way, you'll probably only be right some of the time.

We think investors should maintain a balanced, diversified portfolio – it's best to have a mix of great funds which invest, and therefore perform, differently to each other. Over time a diversified portfolio could perform more strongly and should lead to better, more consistent long-term returns.

Investing like this can mean putting your money in funds that are performing well, and others that aren't doing as well right now. But investing is a marathon. When the tide turns some of your portfolio might well be in the right place to benefit.

We've included some of our latest ideas below, including how they might fit into a wider portfolio. We think they could all be great funds for the long term. There's a range of different styles that could appeal to a range of portfolios and investment objectives. This is not personal advice, and if you're not sure if an investment is right for you please seek advice.

If you're not quite ready to build and maintain a diversified portfolio, we can help. Our experienced team of financial advisers can do the leg work for you.

Investment ideas

Below we highlight some investment ideas across four main sectors.

UK Equity Income

UK equity income funds aim to pay a regular income by investing in companies that share their profits as dividends. They also try to provide some long-term growth in your initial investment. If you don't need the income now, you can reinvest it to buy more shares and help boost the potential for further growth. That's why we think equity income funds can form part of the foundation of almost any investment portfolio – whether the objective is income or growth.

Investing solely in any single market, including the UK, adds unnecessary risk. Make sure you consider UK funds in combination with those that invest elsewhere. All investments and income can fall as well as rise so you could get back less than you invest. Yields are variable and not guaranteed. They’re not a reliable indicator of future income. These Equity Income funds take charges from capital, which increases the yield on offer, but reduces the potential for capital growth.

These funds are shown in alphabetical order.

Sector:UK Equity Income

Artemis Income

This fund aims to pay an attractive income and deliver some long-term growth. The managers mainly invest in large UK companies, but they invest in some medium-sized and overseas companies when they find great opportunities. They target those they think that can grow profits and cash flow because this should support dividends. It’s a more conventional equity income fund that could work well in the core of an income portfolio.

Aviva UK Listed Equity Income

This fund invests in mainly large and medium-sized UK companies, but can also invest in higher-risk smaller ones. It blends those able to offer a high yield now with others capable of strong dividend growth. An emphasis on dividends and dividend growth makes this a more conventional UK equity income fund. It invests in about 50 companies so is relatively concentrated. This add performance potential, but also increases risk. The focus on quality companies could work well alongside a fund that invests in out-of-favour ideas.

Threadneedle UK Equity Income

The fund manager looks for companies that he thinks will pay a high and growing level of income. He also considers the outlook for the economy when constructing his portfolio. The fund invests in FTSE 350 companies that generally have a history of paying consistent dividends. The fund can lag a rapidly rising stock market but aims to do better when the market is struggling.

Trojan Income

The fund manager targets stable and more established businesses that are expected to more reliably pay dividends year after year. A focus on companies that tend to be more resilient means the fund could fall less than others when stock markets fall. It might not go up as quickly when stock markets rise though. He invests in a fairly small number of companies so each one can have a big impact on performance, but a less-diversified portfolio also carries more risk.

UK Growth

The UK stock market offers a range of opportunities – from the giants of the FTSE 100 through to smaller companies with the potential to be the leaders of tomorrow. Smaller firms are higher risk though because they're less developed than larger ones, and can be more difficult to buy and sell.

Our home market is truly diverse. Some companies carry out most of their business in the UK, but others make most of their money overseas. We think the UK is often a good starting point for investors, and most long-term growth portfolios should have some exposure.

Investing solely in any single market, including the UK, adds unnecessary risk. Make sure you consider UK funds in combination with those that invest elsewhere. All investments and income can fall as well as rise so you could get back less than you invest. Yields are variable and not guaranteed. They're not a reliable indicator of future income.

These funds are shown in alphabetical order.

Sector:UK Growth

AXA WF Framlington UK

The fund manager looks for long-term trends in the UK economy. He then invests in companies he thinks will benefit. Companies of all sizes are held in the fund. It invests more in higher-risk small and medium-sized companies than some other UK funds, so it works well with other funds focused on more-established companies. The thematic approach also makes it quite different to other funds.

This is an offshore fund so investors aren't normally entitled to compensation through the Financial Services Compensation Scheme.

HSBC FTSE 250 Index

This passive fund aims to track the performance of the FTSE 250 index as closely as possible, by investing in the same companies as the index and in the same proportion. It is an easy way to invest in medium-sized UK companies, with greater potential for growth than the larger companies of the FTSE 100, but with additional risk.

Legal & General UK Index

This passive fund tries to track the performance of the FTSE All-Share, a broad index of more than 600 UK companies. It is a low-cost and easy way to invest in hundreds of UK companies of all sizes. It could be a good addition to a portfolio of tracker funds, or a great way to start investing in the UK.

Majedie UK Equity

This fund is managed by a team of four, each with their own strengths, styles and areas of focus. They combine more established companies that have consistently grown profits, with those that have been through a difficult time and have the potential to recover. They have had a bias towards value investing in recent years, which has held back performance, as this style has been out of favour with investors. They also invest in smaller, higher-risk, companies. We think it’s a good all-rounder for the UK part of a portfolio.

Global funds

We think it makes sense to have some investments overseas. Global funds are a convenient way to invest in a diverse mix of different countries. Some focus on developed markets and often have a lot invested in American companies – it's the world's biggest stock market so there are lots of opportunities there. They may also turn their attention elsewhere, including to emerging markets or smaller companies, which are higher risk. The in-built diversification that global funds offer mean that they could form a core building block for an investment portfolio.

Global funds that only invest in shares will be more volatile than those that invest in a mixture of different investment types. Consider your objectives, and add investments in other assets if you think you need more diversification. All investments and income can fall as well as rise so you could get back less than you invest. Yields are variable and not guaranteed. They're not a reliable indicator of future income.

These funds are shown in alphabetical order.

Sector:Global

Artemis Global Income

This fund offers dividend-seeking investors the opportunity to globally diversify their income stream. The fund manager likes to invest in lesser-known companies, and aims to deliver income and growth over the long term. He does this by constructing a portfolio of companies with low but rising dividend payments mixed with those with larger pay-outs. The fund's flexibility to use derivatives, invest in smaller companies, emerging markets, and high-yield bonds adds risk. Recently his fund has lagged the global stock market due to his low exposure to fast growing technology companies. The fund takes its charges from capital, which increases the yield on offer, but reduces the potential for capital growth.

Legal & General International Index

This index fund aims to track the FTSE World ex UK Index as closely as possible. It invests in over 2,000 companies in countries from all over the world, including higher-risk emerging markets, except the UK. US companies dominate the index and therefore the fund, but there are lots of companies from other countries like Japan, France and Canada. This fund is a convenient way to invest globally without adding any more exposure to the UK.

Rathbone Global Opportunities

The fund manager looks for easy-to-understand businesses in developed markets. He invests in those he expects to become industry leaders and will be able to defend themselves from competition. He thinks these companies are few and far between, so he only invests in a small selection, which increases risk. It can be a more volatile way to invest if the high expectations placed on companies aren't met, and has the flexibility to invest in smaller companies and emerging markets, which can add risk. It could sit well alongside other funds that are focussed on undervalued or out-of-favour opportunities.

Mixed-asset funds

Mixed Investment funds are a convenient way to invest in a ready-made, diversified portfolio. They usually blend shares and bonds, and the proportions are different for every fund. Shares offer greater potential for long-term growth, but tend to be more volatile. Bonds could help reduce volatility, but offer less potential for growth. Some Mixed Investment funds invest in other assets too, like commodities and cash. Overall they use a range of strategies, so some are more cautious or adventurous than others. Investors should identify the fund that matches their risk profile.

Mixed funds are generally more diversified than funds that only invest in shares, but they're often very different to each other. While some aim to help shelter your money in a downturn, they probably won't grow as quickly when markets rise. All investments and income can fall as well as rise so you could get back less than you invest. Yields are variable and not guaranteed. They're not a reliable indicator of future income.

These funds are shown in alphabetical order.

Sector:Mixed

BNY Mellon Real Return

The fund’s built in two layers. One invests in riskier assets like shares, including higher-risk emerging markets, and high-yield bonds with the aim of making higher returns. The team also use derivatives, which can help reduce volatility, but can increase risk. The other layer invests in assets like government bonds, gold and cash, which could help preserve wealth when stock markets fall. It could be a good option for a more cautious portfolio. The fund takes its charges from capital, which increases the yield on offer, but reduces the potential for capital growth.

EdenTree Higher Income

This fund mainly invests in unloved, dividend-paying companies from across the globe, including higher-risk emerging markets. Their share prices could rise and boost growth once they return to favour. In the meantime the fund aims to pay investors a regular income. Some investment in bonds provides diversification, and can reduce the volatility that normally comes with only investing in shares. Charges are taken from capital, which can increase the yield, but reduces the potential for capital growth.

Schroder Managed Balanced

This fund focuses on a broad range of assets including global shares and bonds, by investing mostly in other funds offered by Schroders. It offers plenty of diversification within a single fund, but some investments in high yield bonds and derivatives increase risk. It could work well as part of the core of a broader portfolio.

Troy Trojan

This fund won’t beat a rapidly rising stock market but has the potential to outperform when the market is flat or falling, and has historically had less volatility than the UK stock market. There’s a relatively small number of investments in the fund, which can increase risk. The fund manager invests more in shares when he has a positive outlook and focuses more on bonds, gold and cash when he thinks stock markets have less potential to grow. This fund could be added to an adventurous portfolio to help reduce the overall risk, or used to add more potential growth to a more conservative portfolio.

Have a question?

Our website offers information about investing and saving, but not personal advice. If you're not sure which
investments are right for you, please request advice, for example from our financial
advisers. If you decide to invest, read our important investment notes first and
remember that investments can go up and down in value, so you could get back less than you put in.